UK FTSE set for best week in 5 months as Carnival rallies

* FTSE 100 up 0.2 pct at 6,594.60 pts

* Carnival (LSE: CCL.L - news) leads gainers as outlook improves

* FTSE to snap run of weekly losses on Fed boost

* Index set for biggest weekly gain since July

* Investors shed hedges as options expire

By Francesco Canepa

LONDON, Dec 20 (Reuters) - Britain's top share index edged higher on Friday as it headed for its biggest weekly gain in five months, underpinned by a rally in Carnival and a well received policy shift from the U.S. Federal Reserve.

Shares in the cruise operator rose 6.1 percent to a three-month high in high volumes as strong results made analysts more confident the firm is restoring its reputation after a series of incidents.

UBS (Xetra: UB0BL6 - news) and Natixis (Paris: FR0000120685 - news) upgraded their recommendations on the stock, which had fallen 16 percent and suffered a raft of downgrades since its Costa Concordia ship capsized in 2012.

"We like the business of Carnival and see potential upside from a brand recovery," Atif Latif, director of trading at Guardian Stockbrokers, said.

Defence company BAE Systems (LSE: BA.L - news) fell 4.8 percent after saying the United Arab Emirates had quit talks to buy Eurofighter Typhoon aircraft, which analysts at JP Morgan (Other OTC: JPYYL - news) describe as a major blow.

Carnival was the top riser on the FTSE, which was up 9.90 points, or 0.2 percent, at 6,594.60 points on the day and up 2.5 percent on the week, leaving it set to snap a six-week losing streak and mark its best week since July.

The weekly gain comes after the Fed began to slow its open ended asset purchase programme but committed to low interest rates for longer.

Volume on the FTSE jumped after the expiry of December options at around 1015 GMT, when 760,160 options to sell the index at 6,600, equal to 2.5 percent of the total open interest in puts, expired, according to Liffe data.

"There were a lot of puts that expired and that means investors are not hedged for any fall," Andy Ash, head of sales at Monument Securities, said.

"That tends to be a dangerous sign. It means when you do get a fall they will get more panicked."

Nicolas Suiffet, technical analyst at Trading Central, said prospects for the index were not good unless it could break through the previous top of 6,819.85.

"The upward potential should be limited by the resistance area 6,621/6,668," he said.

"As long as this area is not penetrated, the FTSE 100 index is likely to resume its downtrend towards 6,422 and 6,316."